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BALANCE OF PAYMENTS

What's Old Is New

Like vintage wine, some old ideas look even better with age. As the Obama administration begins to formulate a coherent trade strategy, it should take a hard look at two concepts that dominated trade policy debates in the 1980s: a balance of benefits and reciprocity. A 21st century trade policy framed by these objectives could help reduce the U.S. trade deficit to a more sustainable level and bolster public support for continued American engagement in the world economy.

There is an implicit bargain in all international trade agreements. "The starting assumption has been that the obligations undertaken by each country involve a balance of benefits," wrote Robert Hudec, an authority on international trade law, in "Development, Trade, and the WTO," adding, "The benefits granted to others in the form of a country's own obligations, balanced against the benefits that country obtains from the obligations undertaken by others."

 

In the mid-1980s, the European Community suggested making this balance of benefits concept explicit in the Uruguay Round of multilateral trade negotiations. Brussels proposed withholding benefits to trade surplus countries if their markets were not sufficiently open. Washington rejected the idea as Japan-bashing. At the time, the U.S. merchandise trade imbalance with Japan was $46 billion. Today that deficit is $73 billion.

The balance of benefits principle deserves new consideration by the Obama administration. Pursuit of a narrow balance in trade would neither be workable nor economically sound. The multiple benefits and costs of any trade transaction are difficult to pin down with any precision. And short-run costs can turn into long-run benefits.

Nevertheless, it is possible to recognize when trade has become dangerously out of balance, as it is today, with the U.S. current account deficit equaling 4.7 percent of GDP. Moreover, public support for trade has eroded precisely because people do not believe that trade agreements are fair or deliver sufficient value to the United States. The Obama administration should frame future U.S. trade policy with an eye on attaining a more economically and politically sustainable balance of benefits.

 

Reciprocity is one tool that could be used in pursuit of that goal. "Reciprocity is a practice of making an action conditional upon an action of a counterpart," wrote World Bank trade expert Bernard Hoekman, in "The Political Economy of the World Trading System."

And Article 28 of the General Agreement on Tariffs and Trade, the predecessor to the World Trade Organization, lays down the principle that negotiations should be conducted "on a reciprocal and mutually advantageous basis."

Reciprocity, with its implicit focus on promoting a country's exports rather than valuing imports, has long been attacked as mercantilism. Economists argue that unilateral import liberalization benefits consumers and thus should be pursued even if it is nonreciprocal and a nation's exports do not increase. But this economic reasoning fails to address the unintended economic consequences when non-reciprocity leads to unsustainable current account imbalances.

Moreover, the benefits from imports are economically dispersed across all consumers while the costs in the form of heightened competition in the domestic market are concentrated on just a few domestic producers. So it is necessary for elected officials to be able to point to specific benefits from trade reciprocity to help counterbalance the inevitable backlash against imports' unavoidable costs.

 

But Harvard University's Robert Lawrence and the Brookings Institution's Charles Schultz in 1990 wrote in "An American Trade Strategy," that "because of U.S. fealty to the free-trade ideology and geopolitical interest in having other countries support it, the United States has in practice stopped negotiating for serious reciprocity."

This can change under the Obama administration. In the 110th Congress, a small number of Republicans and Democrats proposed reciprocal market access legislation. "This legislation," reads the bill's summary, "will provide additional leverage for USTR to ensure that negotiated agreements result in real market access for U.S. producers and not just result in eliminating tariffs on imports into the United States."

The proposal would require that the president provide a certification to Congress in advance of agreeing to a modification of any existing duty on any product and that certification would affirm that reciprocal market access has been obtained. It also would instruct U.S. trade negotiators to seek the right to revoke concessions to cut tariffs if U.S. trading partners do not implement the commitments they have made to open up their markets.

Critics will argue that such legislation would tie the hands of U.S. trade negotiators and deny the United States too many of the benefits of open markets. But the Obama administration can head off such problems by announcing that a balance of benefits and reciprocity are the twin pillars of its new trade policy.

It can then pursue trade agreements that have a chance of being reciprocal, such as a free-trade deal with Europe. In so doing, the White House can demonstrate that it is committed to a trade policy that helps reduce the U.S. trade deficit and rebuilds Americans' trust in a global market.

This article appears in the May 16, 2009 edition of NJ Daily.

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